Accounting Restatements Arising from PCAOB Inspections of Small Audit Firms

Dana R. Hermanson, PhD, and Richard W. Houston, PhD, and Zhongxia (Shelly) Ye, PhD

Inspections by the Public Company Accounting Oversight Board (PCAOB) of small audit firms (i.e., those with 100 or fewer issuer clients) often reveal audit deficiencies or quality control defects, both of which have been studied previously (see Dana R. Hermanson, Richard W. Houston, and John C. Rice, “PCAOB Inspections of Smaller CPA Firms,” Accounting Horizons, June 2007; Dana R. Hermanson and Richard W. Houston, “Quality Control Defects Revealed in Smaller Firms’ PCAOB Inspection Reports,” The CPA Journal, December 2008; and Dana R. Hermanson and Richard W. Houston, “Evidence from the PCAOB's Second Inspections of Small Firms,” The CPA Journal, February 2009; PCAOB Release 2007-010, October 2007). In addition to identifying audit deficiencies or quality control defects related to the inspected audit firm, PCAOB inspections also may identify material misstatements in the financial statements. If so, a client of an inspected firm may end up restating its financial statements as a result of issues uncovered in the PCAOB inspection.